Small Banks Should Consider Hiking Fees, Says New ICBA Chair

HONOLULU — John Buhrmaster has a message for his fellow community bankers: it's time to consider raising fees on deposit accounts.

Buhrmaster, the president of Glenville Bank Holding (GLNV) and its First National Bank of Scotia, is the incoming chairman of the Independent Community Bankers of America. He will officially take the helm Tuesday at the trade group's annual conference here.

A fourth-generation banker — his father, Louis, is still chairman and chief executive of the $414 million-asset bank – Buhrmaster will spend the much of the next year fighting for community banks as they struggle to keep pace with an ever-growing list of regulations and the higher compliance costs that accompany them.

But, as he travels the country over the next 12 months, he also intends to remind his counterparts that they can't stand pat. He says that bank margins are at "historic lows" and that it's crucial that management teams find new income streams if they hope to stay relevant.

In a wide-ranging interview, Buhrmaster, 49, discussed the regulatory challenges small banks face, his issues with big banks and why smaller banks need to take a serious look at charging more for the services they offer.

Here is an edited transcript of the conversation.

What are your biggest priorities as ICBA chairman?

JOHN BUHRMASTER: The biggest priority for me and the ICBA is the regulatory burden that continues to rain down on community banks. As a smaller bank, we just don't have the resources to deal with the regulations that are just pouring down on us as a result of the bad actors out there.

What are the harshest new regulations for your bank?

The regulations that are affecting me right now are tied to qualified mortgages. The [Consumer Financial Protection Bureau] does not look at us differently despite the fact that we hold these loans in our portfolio. We're seeing examples of [applications from] self-employed small-business people where we just cannot meet the QM guidelines. And I don't think that was taken into consideration.

You add onto it the bulletin sent out recently by the CFPB that doesn't outright encourage litigation but certainly reminds [consumers] of their rights to litigation. That is creating a new cottage industry for lawyers who are offering to help people going through foreclosure to get out of their debt.

Looking toward the future, one of the scariest things for me is the Basel III rules... particularly the capital buffer. The outcry from the mutual banks was incredible. It completely ignores the mutual banks and closely held banks like ours, where our only method of raising capital is through retained earnings. To come up with an extra 2.5%, you're going to have to sell a chunk of your bank. Whenever that happens, you inevitably start the stopwatch on the loss of control and the probability of a merger down the line.

Some of the largest banks in the world barely maintain a 2.5% capital. When you look at the leverage ratios at some of the largest banks and the leverage ratios at the point of failure for a lot of community banks... there were community banks that failed that actually had higher leverage ratios. To me, it is an unfair subsidy put on the backs of taxpayers and consumers. Businesses should be able to succeed or fail in this marketplace and it creates an uneven playing field.

That takes us back to the TBTF debate, right?

There are different types of banks with different business models. The community bank business model is relationship-based. When you get these large behemoths that are reporting only to Wall Street and giving out outsized bonuses for performance that doesn't necessarily relate to building a relationship with a customer, it is a different business model. The too-big-to-fail debate is real and tiered regulation is absolutely needed.

But exemptions certainly have helped community banks.

They do. Exemptions really do fall under tiered regulation. We are much more closely monitored than the largest institutions are. The items that they get into when they come into our bank are very intricate and very detailed. And there is no way they could get into that type of detail at one of these larger institutions.

How does your bank plan to grow with so many challenges?

It is not like it was when my grandfather or father ran the bank. Our margins are at historic lows.... It is showing up on our balance sheet as lower earnings and less ability to retain capital. So we have to look outside the box for other areas where we can find noninterest income. We were in insurance business from the '40s to the '70s. We are back in it after purchasing an agency last year. It fits ideally with our product. We are primarily a consumer lending bank. We do a lot of indirect auto lending, and the agency we bought has been doing auto insurance since the 1920s.

We also have to look at the pricing of our accounts. We're seeing that the larger banks have increased their fees and, very often, fees at community banks run far behind. Community banks have been averse to fees. It is part of our nature because people value their relationship, but we're going to have to get used to charging people for the services that they use and realize that there is a tremendous value to what we provide.

In the Northeast, we're seeing an uptick in lending... but it is highly competitive here because everyone has excess deposits.

What kind of borrowers are out there? What is your loan mix?

Right now, the borrowers we're seeing are ones that actually have capital and were waiting to pull the trigger. The combination of the economy and the rate environment has hit the perfect match. They are coming in to execute. About 40% of our loans are in indirect lending, 25% is commercial and the rest is [mortgages and credit cards].

Your percentage of indirect auto is high for a community bank.

We've been in the business since the 1920s. You get in and out of that business, but we've been straight back in it since the mid-1980s. We gather a tremendous amount of deposits through that. It is about relationships. We've had people who have bought three, four, five cars through us. We have multiple generations and we have great relationships with dealers. We don't credit score. We underwrite each loan with a fast turnaround. It is, in essence, an adjustable-rate portfolio, with an average term of six years.

Will the regulatory environment force consolidation?

We're already seeing it. We've seen it in different areas of the country more than others. You may not seeing the large multi-regionals being picked up by the mega banks. But you are seeing banks with several hundred million dollars joining forces. It is just difficult to manage that regulatory burden as a smaller bank with fewer employees. Economies of scale are affecting that. If there is going to be a merger, you love to see two community banks merge, but you're still losing a local presence. It concerns us.... The regulatory burden is causing unnecessary consolidation.

The ICBA objects to excessive call reports. What call report items get under your skin?

Call reports developed as a way to monitor safety and soundness. There is a transition where more information is being requested for social purposes that do not relate to safety and soundness. I question if the call report is the correct way to collect that.

I'm perplexed as to what the reporting of ATM usage fees has to do with the primary purpose of safety and soundness reporting. With the choice available in today's marketplace, consumers are easily able to choose the reasons they maintain their accounts with a particular bank, and the level of fees that are acceptable to them. Competition is fierce for customers, so service charges on accounts and fees for bank services vary greatly. ATM fees are fees for services used. No one is forced to use an ATM. It is a choice.

Only the gross fee income from the operation of ATMs is requested, not the complete expenses related to providing that service. Our small bank has spent over $300,000 upgrading our ATM machines to be Windows and EMV compliant. It will be a long time before we have recovered that expense from usage fees. The entire list of changes requested on this schedule change will eat up a tremendous amount of programming time with our core software providers, time that could be better used to provide better and more efficient services for our customers.

How is your bank's individual relationship with its regulator?

I have a terrific relationship with the regulators. It is kind of ironic. Do I agree with everything they do? No. But do they listen when I tell my story? Yes.